Use Miller's Model in capital structure theory to answer this question.

ABC Company has a constant EBIT that is expected to continue in perpetuity. The value of ABC Company when it does not have any debt is $500,000. The unlevered cost of equity (R₀) for the company is 10% and the corporate tax rate is 35%. The personal tax rate on equity income is 40% and the personal tax rate on bond income is 22%.

(a) If the company issues a perpetual bond with a market value of $400,000,

(1) what is the value of the company with leverage and with no financial distress cost?

(2) for every dollar of debt, is there a gain or loss from leverage for the company? If yes, what is this gain/loss from leverage for every dollar of debt?

(b) If all of the above remains constant except for the personal tax rate on bond income (T_B), what

T_B would make the company have zero gain from the leverage of $400,000?